European officials have long been concerned about the country’s domestic banking sector, which has assets of more than seven times its annual economic output – giving it a disproportionate role in the island’s economy.

The banks weathered the global financial crisis and the initial stages of the eurozone’s debt crisis relatively well.

But then came last week’s decision by European leaders to put pressure on Greek bond owners to accept losses on their holdings.

This had an exaggerated effect on Cypriot banks, two of which are among the largest holders of Greek bonds in Europe.

Even as European leaders were causing turmoil in the bond market as they dithered over the size and scope of Greek bondholder losses, another drama was unfolding in Nicosia: the Communist-led government was locked in a bitter fight with trade unions and rival parties over an austerity programme to get its deficits under control.

Just last month, the European Commission warned that without such modifications, Cyprus would not achieve its European Union-mandated budget targets.

Then, as if a banking crisis and a political crisis were not enough, a much more grisly disaster struck.

Two weeks ago, the country’s largest power plant blew up after a cache of Iranian munitions confiscated by authorities exploded, killing 13 people.

The fallout from the trio of disasters has plunged the island’s government, long known for its military standoff with the Turkish half of the country, into a different kind of chaos, which the head of its central bank likened to the 1974 Turkish invasion that split the island.

Ministers have resigned amid accusations that they may have known of the danger posed by the Iranian munitions.

Protesters have taken to the street demanding even more scalps.

And the much-needed austerity programme has become a casualty of the fallout.

As a result of that strain, the government announced on Wednesday that Demetris Christofias, the president, was to ask for the resignation of all members of his cabinet at a meeting today. This followed the junior party in the governing coalition, the Democratic party, urging its ministers to resign.

In its announcement downgrading Cypriot bonds on Wednesday, Moody’s Investors Service cited political upheaval as a primary reasons for its change in opinion. For the EU and other European leaders, however, it is the banking sector that has been the focus of concern.

Nearly 40 per cent of all loans extended by Cyprus’s three largest lenders – which account for 55 per cent of the country’s total bank assets – are to customers in Greece.

In addition, stress tests released by the European Banking Authority this month showed that, among non-Greek banks, two Cypriot groups – Marfin Popular Bank and Bank of Cyprus – were the third-largest and seventh-largest holders of Greek bonds in Europe.

Constantinos Pittalis, head of investor relations for the Bank of Cyprus, said on Wednesday that the bank had reduced its exposure to Greek bonds by about €700m ($1bn) to €1.7bn since the stress tests were held as some of the debt matured and some was written down.

But the holdings still raised concerns at Moody’s, which said Nicosia would probably have to recapitalise the banks.

Although the potential Greek debt hole in Cyprus is not as large as the losses faced by banks in Ireland, it is still large for a country with a gross domestic product of €17bn.

well from my point of view we are well we have a bbb+ rating while other european countries are in deep trouble also as i know with the findings of petrol we will have a new income yes we are currently in distress due to the errors in marri but fortunately we will recover if we stand together as in cyprus political parties tend to fight one other and not work in cooperation